The SME’s Guide to Raising Capital: P8 – (Wise) Capital Deployment
This post, which will cover some insights on capital deployment, and the upcoming column, the final in the series, which will cover shareholder communications/relations, don’t, at least on the surface, directly pertain to raising capital. However, your ability to re-raise capital down the road will undoubtedly hinge on how well you make use of the money you’ve just secured, and how well you maintain relations with your current shareholders.
Diving in now…
A recent study on tech companies in the US found that the average time in between startup death and the close of the latest funding round was 20 months. What this shows is that startups burn through money quickly, at a rate that often outpaces their ability to deliver value to customers.
The cash that you just worked so hard to raise should be viewed as the fuel for your company’s petrol tank. You can’t keep going without it, and if you’re not yet generating revenue, then the external capital that you just raised is all that you’ve got. Never operate under the assumption that you can simply re-raise capital. You might find that it’s harder the next time around, as raising money can be heavily influenced by factors outside of your control. Oil prices could plummet to $30 a barrel, for example.
Spend wisely, be frugal
With this in mind, it’s clear that controlling burn rate — the rate at which you spend capital — is crucial, and frugality is the best way to accomplish this. Frugality entails being economical with spending. In other words, allocate your money wisely. Spend on things you really need. Don’t spend on things you don’t need.
Spend on things like customer service and experience (without satisfied customers you don’t have much of a business), on market research, on relevant and measurable marketing campaigns, on a financial controller (they will help you be smart and thrifty with your resources).
When you spend, make sure you’re getting the best price possible. Ask for a discount, even if you can easily pay for the product or service. Every little bit adds up over the long haul. Hopefully you will have developed this habit while you were bootstrapping, and if so, bring it with you now that your coffers are full. This will help them stay full for a bit longer. If you haven’t instilled the discount-seeking mentality in yourself and your team, start now.
One of the greatest gifts you can give yourself as an entrepreneur is getting to the point where you are what Paul Graham and co. at Y Combinator call “ramen profitable”. Ramen profitability is the point in which you are generating enough revenue to cover the founders’ living expenses, however paltry they may be. What this does is remove the urgency involved in re-raising capital. You’ll likely need to re-raise at some point, but if you’re ramen profitable, you can sustain yourself without having to raise external capital. You can survive on your own, and survival is better than death, at least for a while.
Aside from making you less dependent on investors who may or may not be there when you need money at some point in the future, ramen profitability will demonstrate that you’ve got a product people are willing to pay for and that you possess the all-important quality offrugality. Prospective or current investors will take note of this and might be more inclined to part ways with their money the next time you raise.
Of course, not all businesses can or should become profitable early on. Businesses that require lots of R&D and product development will be spending all they’ve got doing just that. But with the costs of starting and running a business continuing to go down, ramen profitability is becoming increasingly realistic for more and more businesses.
Lesson Eight: The mentality you have when it comes to spending shouldn’t change according to how much cash you have in the bank. Be frugal, always. This doesn’t mean you should not spend on what’s needed to get to your next milestone and scale — that’s exactly what you should be spending on. But have an honest conversation with yourself and your team about what’s necessary and what isn’t. Focus your spending on things that will better enable to you create value for your customers, which will in turn create value for you and your shareholders.
Read Part 1 – To raise, or not to raise?
Read Part 2 – Who should you raise from?
Read Part 3 – Debt vs Equity Financing
Read Part 4 – When to raise
Read Part 5 – Pitch Psychology
Read Part 6 – Pitch Presentation
Read Part 7 – Pitch Financials